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02 Sep 2010
Approximately $685 million of rated debt affected
New York, September 02, 2010 -- Moody's Investors Service placed on review for possible downgrade its
ratings for Deluxe Entertainment Services Group Inc. ("Deluxe"
or the company) and subsidiary Deluxe Toronto Ltd. ("Deluxe Toronto"),
including the company's Corporate Family Rating (CFR), Probability
of Default Rating (PDR) and individual instrument ratings, as outlined
The review incorporates the company's underperformance relative to expectations
in conjunction with Moody's ongoing negative outlook for the core processing
and distribution of film footage business lines due to digital substitution,
both domestically and internationally. The review will focus on
management's ability to take strategic action(s) that might mitigate these
concerns, and could result in more than a one-notch downgrade
in the absence thereof. The expected broad-based roll-out
of digital projectors is fueled in part with funding raised earlier this
year by digital projector integrators who are closely aligned with major
studios, as well as theatre exhibitors.
The following ratings were placed on review for possible downgrade:
..Issuer: Deluxe Entertainment Services Group,
.Corporate Family Rating - B1
.Probability of Default Rating -- B1
....Senior Secured 1st Lien Bank Credit Facility
- Ba3, LGD3 - 39%
....Senior Secured 2nd Lien Bank Credit Facility
- B3, LGD5 - 84%
..Issuer: Deluxe Toronto Ltd.
....Senior Secured 1st Lien Bank Credit Facility
- Ba3, LGD3 - 39%
Deluxe's financial leverage (as measured by Moody's adjusted debt-to-EBITDA)
of approximately 4.2x at 6/30/10 (vs. 4.5x at 12/31/09)
remains relatively high in light of heightened business risk and is above
Moody's expectations as well as management's plan.
Despite 9.4% consolidated revenue declines over the last
six months, the company has maintained EBITDA levels through proactive
cost reductions, improving product mix, tighter working capital
management, restructurings as well as establishing joint ventures
to achieve operating efficiencies. In the face of continued revenue
declines in film processing and distribution, and factoring in planned
organic growth in creative services business, we believe it will
be unlikely for consolidated revenue and EBITDA levels to be maintained,
absent acquisitions, given that distribution and processing account
for 64% and 58% of combined revenues and EBITDA, respectively.
We plan to meet with management to review the company's strategy to transition
the business mix away from its reliance on 35mm film processing and distribution.
The last rating action was on December 1, 2009 when Moody's withdrew
ratings on Deluxe's cancelled note issuance.
Deluxe's ratings were assigned by evaluating factors that Moody's considers
relevant to the credit profile of the issuer, such as the company's
(i) business risk and competitive position compared with others within
the industry; (iii) capital structure and financial risk; (iii)
projected performance over the near to intermediate term; and (iv)
management's track record and tolerance for risk. Moody's compared
these attributes against other issuers both within and outside Deluxe's
core industry and believes Deluxe's ratings are comparable to those of
other issuers with similar credit risk. Additional research can
be found in the Deluxe Credit Opinion on www.moodys.com.
Deluxe Entertainment Services Group Inc. ("Deluxe"), headquartered
in Los Angeles, CA, is a worldwide supplier of film processing
and distribution (64% of LTM 6/30/10 revenue) as well as creative
services (36% of revenue) to the major producers and distributors
of motion pictures and television programs. Deluxe is an indirect
wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc.
("M&F"). Revenue was approximately $993
million for the LTM period ended June 30, 2010.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Places Ratings for Deluxe Entertaiment on Review for Possible Downgrade
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New York, NY 10007
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